Embedded Insurance –Why Will it Matter More in 2023?

By Nina Mayer, from the Earlybird Digital West Investment Team

A new wave of InsurTech companies democratizes access to embedded insurance for retailers of all sizes, providing higher flexibility and better customer experience. New regulations and the current macro economy will accelerate this trend in 2023, making embedded insurance a topic to not sleep on!

Each of us has come across 3rd party insurance sales before. Whenever one buys a laptop or a washing machine, we have the option to purchase additional insurance for our new treasures, for instance, a) extended warranties or b) full insurance coverage including theft and damages.

Such 3rd party insurance sale has been available for decades, seen as a win-win-win situation:

• It is a way for retailers to create additional revenue & boost conversion rates, both via online and offline sales
• Insurers benefit from more efficient sales by leveraging customer relationships and customer data of retailers. This addresses the common problem of high distribution costs in insurance (“Insurance is sold, not bought”, Dealroom)
• The end customers benefit, given that they are offered insurance when and where it matters most.

While the concept has always been popular, real-life execution came with hurdles for retailers and insurers alike — integration processes were both lengthy and costly, and hence only accessible for large enterprise retailers. Insurance products were inflexible, and not adapting to a changing product portfolio. Insurance margins were typically thin given 1) the technical capacities needed, and 2) the high competition within tender processes, with little opportunity to differentiate from a product perspective.

Hence, a new wave of InsurTech companies arose in the space. As opposed to “integrated insurance”, new companies create a truly embedded insurance experience. How so?

• API solutions that offer the greatest flexibility to the retailer, allowing for fast implementation (largely in a self-serve matter), and a “one-click experience” in their checkout journey, without impact on conversion rates
• More personalized & customizable insurances, quickly adapting to a changing product portfolio of retailers. This also includes a wider product range outside of consumer electronics where embedded insurance is already widespread
• Outstanding customer experience with modern and fast claims management, controlling the whole customer journey to avoid any brand dilution of the retailer
• International insurance offering which allows retailers to work with one insurance player across markets
• Integration with existing customer and product data allowing effective quoting & underwriting based on the customer- and product-level, as well as enabling the collection of previously unavailable usage data over the insurance policy’s lifetime.

These new insurance players can leverage a massive market opportunity. The embedded insurance market is projected to account for over $ 700bn in Gross Written Premiums by 2030 in the property and casualty (P&C) insurance space alone, representing a whopping 25% of the total global P&C market (Simon Torrance). Given this strong market momentum, it should come as no surprise that this new wave of InsurTechs has attracted significant VC investment. Embedded insurance startups have collectively raised almost $ 800m in 2021 (Dealroom).

Why now? European retailers should have embedded insurance at top of mind for 2023.

• We face a regulatory shift in Germany (likely to be extended to the whole EU). From 2023 onwards, selling warranty extensions is legally regarded as “insurance sales” (as soon as it is sold as an explicit opt-in solution, and not simply priced-in among usual products or maintenance plans; see German Court decision; the deadline is mentioned here). Consequently, retailers need to acquire their own licenses for insurance sales in order to sell warranty extensions, or they can partner up with an insurance company. When choosing an insurance partner, they will benefit from tech-focused players with a simple and flexible API offering (as described above.)
• Current market dynamics are impacted by inflation and the current energy crisis are leading to less e-commerce spending. This requires retailers to tackle new revenue streams and better monetize their remaining customers. At the same time, consumers seek more security when purchasing high-value goods in crisis times, hence the demand for insurance products is expected to increase.
• Retailers should make sure to stay ahead of the curve, given that the trend of embedded insurance is growing in all kinds of e-commerce verticals.

Navigating the landscape

Given the clear trend toward embedded insurance, it is important to take a closer look at the rising competition in the space. At Earlybird, we see the biggest potential in verticalized end-to-end players. Hence, we co-led hakuna’s € 4m Seed round earlier this year. hakuna has a deeply integrated, vertical solution for device protection in e-commerce.

We identified the following key differentiators in this category of device protection in e-commerce:

• Omnichannel integration: retailers strive to create one holistic customer experience across their online and offline channels, with the same prices for insurance products. Hence, they seek an embedded insurance solution that integrates into both — their online shops and their store systems
• Integration & flexibility: solutions differ regarding how easily they can be integrated into retailers’ existing checkout processes and in the degree of autonomy they give retailers in modifying the policies offered. Single-click API solutions that integrate at the backend offer retailers full control over how to integrate the solution into their check-out.
• End-to-end service: a modern claims process and a vast network of repair shops are key to driving retailers’ customer satisfaction and retention. While some providers cover the whole customer journey from check-out to repair shop, others only offer partial solutions or pure platform plays connecting incumbent insurers with merchants. Only end-to-end solutions can provide a truly transparent and seamless user experience as they can control this whole process.

In all of these dimensions, hakuna offers retailers the greatest value, putting them in the pole position for becoming Europe’s new embedded insurance champion.

Looking ahead

In today’s fiercely competitive retail environment, offering seamless and user-centric embedded insurance for individual products allows retailers to stand out and generate new revenue streams.

A growing number of startups have set out to provide solutions for this massive market that established players struggle to serve at scale. Tomorrow’s dominant players in this space will be those that manage to provide an end-to-end service that flawlessly integrates into check-out processes across online and offline channels while allowing retailers to customize their policies. Given the international footprint of their customer base, these players will be able to quickly expand beyond their home countries.

Find me on LinkedIn if you are building something new in the InsurTech space!